Oil retreats as inventories rise

CBS.MarketWatch.com

NEW YORK (CBS.MW) -- Crude plunged more than eight percent, dropping below $31 a barrel on Wednesday after soaring above $34 on Tuesday amid an easing of fears of insufficient supplies due to sizable increases in last week's crude and gasoline supplies.

Prices also fell on an increasing belief that OPEC will decide to increase output after the current production curb agreements expire at the end of March.

On the New York Mercantile Exchange, April crude sank $2.87 to $31.26, after slipping as low as $30.80 in the last few minutes of the trading session. On Tuesday, the contract hit at a more than nine-year high at $34.20.

April heating oil fell 7.07 cents to 75.31 cents a gallon. April unleaded gasoline lost 6.73 cents to 95.18 a gallon. See latest commodity prices.

"Looks like the combo of OPEC and the (supply) stats were were too much for the market to bear," Victor Yu, vice president of financial services company Refco Inc.

"While OPEC's appearing to come closer to a consensus between two of its biggest members is a positive development for consumers. The same two questions that have nagged the market for the last several months -- how soon and how much -- still remain unanswered. Until we get a clearer picture on this, the market's downside is limited," he said.

After the market closed Tuesday, the American Petroleum Institute reported a 7.6 million barrel climb in crude oil stocks for the week ended Feb. 3. Early Wednesday, the Department of Energy reported a 4.6 million barrel rise.

According to a survey conducted by Bridge News, the market perceived crude inventories either unchanged or up by no more than 500,000 barrels.

In gasoline supplies, the API data also revealed a 4 million barrel rise. Total supplies, as of last week, stand at 199.7 million barrels. The market had been looking for a rise of no more than 500,000 barrels, according to the Bridge survey. The Energy Department reported an even bigger rise of 4.5 million barrels.

Distillate stocks were nearly unchanged, down by 356,000 barrels vs. an expected rise of as much as 1 million barrels. According to the Energy Department, stocks rose a much bigger-than-expected 1.7 million barrels.

Refinery production rates likely climbed 87.9 percent, up from the prior week's 88 percent, according to the API data.

On the upside for crude prices, even with the increases in supplies of crude and gasoline, inventories are seasonally very tight," William Randol of Banc of America Securities said in a research note. "Each major petroleum product inventory remains well below five-year seasonal averages," with crude oil 8.3 percent below the five-year season average, gasoline at 7.6 percent below, and distillates at 9.8 percent below, Randol said.

Awaiting OPEC's next move

Petroleum futures were also pressured by a statement from Iran and Saudi Arabia which implied that OPEC and non-OPEC oil producers may decide to increase production at their March 27 semi-annual meeting.

The comments "hinted at a consensus on increasing output," said Yu. However, "an Iranian official reiterated that Iran's position remains unchanged after the talks and that Iran is opposed to increasing output in the second quarter," Yu said.

Also, Shell Nigeria said it has resumed loadings of Bonny and Forcados crude after a two-day workers' strike.

In news this week, oil officials from Iran, Libya and Algeria said Monday that they believed OPEC can actually keep current production curbs beyond March 31, as the second quarter usually sees a decline in demand. The three oil ministers also said they would meet again to discuss the oil situation before the cartel's official meeting.

Oil ministers from Iran, Saudi Arabia and the United Arab Emirates are scheduled to meet on Saturday, according to Yu.

On Tuesday, President Clinton turned up the political pressure on OPEC to halt the soaring oil prices, stating that high oil prices could hurt world economic growth. "I think everybody recognizes that they're too high" and right now, demand exceeds supply, he said.

Crude closed at $34.20 a barrel on Tuesday, its highest level since November 1990, on uncertainty over OPEC production levels after output cut agreements expire at the end of March.

Meanwhile, April natural gas closed down 8.9 cents to $2.71 per million British thermal units.

Late Wednesday, the American Gas Association reported a 29 billion cubic foot decline in last week's natural gas stocks. Analysts were looking for a 40 billion to 50 billion cubic foot drop.

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